Understanding How Credit Works Can Save You $$$ 

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What's Your Score?  What Does It Mean?

 

Every time you apply for a credit card, a mortgage, insurance, or perhaps even a job, your application is judged in part by your credit score.  Ranging from 300 to around 850, the number is used by lenders to objectively measure your creditworthiness.  The higher the score, the more likely you are perceived to repay credit.

FICO scores are the most commonly used credit bureau scores in the world, and range from 300 to 850.  They are available through all of the major consumer reporting agencies in the United States -- Equifax, Experian, and TransUnion. 

(FICO is a credit scoring system devised by Fair Isaac Corporation.  For more on FICO, visit myFICO.com, or read "What's In -- and Not In -- Your FICO Score".) 

Factors that affect your credit score include payment history, the amount of debt you carry, length of credit history, whether you frequently apply for new credit, and your credit mix (credit cards, retail cards, mortgage, personal loans).  Consumers with lower scores often pay higher interest rates on mortgages, loans and credit cards because they are viewed as riskier customers.  So the higher your score, the more you save.

To order your credit report for free, go to www.annualcreditreport.com.  You can order one free credit report a year from each of the three credit reporting bureaus.  We suggest ordering one of the three every four months.  The people at Coosa Pines can discuss your credit score in relation to your overall credit picture, and offer suggestions for building a good score.

 

1.  First and most importantly, pay on time!  Making payments on time is the number one way to improve a credit score.  Payment history accounts for 35% of the FICO score, so late or missed payments, foreclosures and bankruptcies will have the greatest negative effect on your score.

 

2.  Second, check your credit report regularly.  Don't let inaccurate information ruin your credit report.  Everyone is entitled to a free annual credit report from each of the three major bureaus -- Equifax, Experian, and TransUnion.  We suggest rotating the bureaus to obtain one free report every four months in order to catch any errors or problems right away.  Report any errors on your report in writing to all three bureaus.

 

3.  Third, keep debt in check.  The ratio of the balances you carry to total available credit will affect your score as well as lending decisions.  If you have more credit available than what you use, you are considered a lower risk.  Try to keep your account balances below 50% of your available credit.  For instance, if your credit card has a limit of $2,000, don't carry more than a $1,000 balance.

 

4.  Next, when shopping for a loan, submit your applications within a limited time.  If done in a short period of time, multiple inquiries on a credit report will count as one inquiry to a potential lender looking at your credit report.  Excess inquiries strung out over a longer period could negatively affect your credit.

 

5.  Fifth, and perhaps surprising, keep your accounts open.  Time is one of the most significant factors that can improve your credit score.  Many people think paying off an account balance means they should close the account.  But closing old accounts -- especially ones with good payment history -- shortens your credit history and lowers your score.  Lenders take into account the average age of your accounts, so an older account can help balance new credit.

 

6.  Last, keep a healthy mix of credit.  This might include a mortgage, a credit card or two, and perhaps a couple of auto loans.  Too much of any one kind -- like credit cards or finance company loans -- will lower your score.

 

Nobody likes getting turned down for a loan.  And although Coosa Pines FCU makes every effort to approve loan requests, it's sometimes necessary to deny an application -- to protect the applicant's financial health, as well as the credit union's.

When the credit union denies a loan, it's usually because the applicant has either (1) a poor credit history or (2) a high debt-to-income ratio.  Your debt-to-income ratio is the percentage of your total debt compared to income.  For example, if each month you pay $400 toward debt with a $1,000 gross (before tax) monthly income, your debt-to-income ratio is 40% (400 divided by 1,000).

Although there's no magic ratio to shoot for, a rough guideline is that total debt shouldn't exceed about 45% of total income.  The credit union also weighs other factors, and requirements vary for different loans. 

If your loan request gets rejected, here are a few things you can do to improve your chances for approval on your next application:

♦♦ Devise a plan to pay off old loans, including credit card balances, thus reducing your debt-to-income ratio.  This will also raise your credit score.

♦♦ You may qualify to consolidate your loans and credit card balances into one loan at Coosa Pines; then stop over-using credit cards.

♦♦ Get a handle on your budget by comparing what you spend with what you earn.  A budget can help you trim expenses and funnel money toward paying off old debts.

♦♦ Fix your broken credit history.  Coosa Pines will work with members who are sincere about re-establishing good credit.  Share secured loans are loans secured by your share savings account funds, and are a good way to build a good payment history.

♦♦ Consider bolstering your income with a second job -- temporarily -- to help trim your debt.

 

If you have more questions about credit, feel free to give us a call.  A Coosa Pines Loan Officer would be happy to help you get on the right track to a good credit history.